How Have the New Mortgage Rules Impacted the Price of Homes throughout Canada?
The last few years have brought great change to the Canadian housing market, primarily due to the most recently implemented mortgage rules that were put in place. While these changes and rules have been put in place as an attempt to protect Canadian’s from getting in too far over their heads with costly mortgages, they have also had what many consider to be a negative impact on the national housing market as a whole.
How Have Previous Government Imposed Changes and Rules Impacted the Cost of Homes Throughout Canada?
In 2007, shortly before our neighbors to the south experienced a burst in the real estate bubble, the average cost of a house in Canada was $309,457. Since then the cost of houses here in Canada has grown exponentially, with the average cost of a home increased by 55% between 2007 and January 2018, to $481,500. Between that time the government made several attempts at protecting Canadian citizens from experiencing a burst to the housing market like the once felt in the states.
In a recent study, the National Bank released information comparing the way that regulatory changes impacted the National Home Price Index. This index provides insight into the price changes on the repeated sale of homes. It includes a rolling average that is calculated every three months. It should be noted that the only homes used in this calculation have gone through at least two sales.
Let’s Take a Look at 3 of the Most Impactful Regulatory Changes
Putting an End to 40-Year Mortgages
Initially announced in July 2008 and then put into action in October 2008, the government ended the tradition for 40-year mortgages and replaced it with a new maximum length of 30-year. At the same time, it was announced that down payment could be as little as 0-5% and a new minimum credit score was also announced.
Immediately following this the housing price index dropped significantly. However, by spring 2009, the housing price index began to see a dramatic switch and saw 16 consecutive months of consistent price increases.
The Initial Stress Test
In October 2016 it was announced that there would be a new stress test put in place as a way to ensure that anyone who qualified for an insured mortgage would qualify at a higher rate than those without an insured mortgage. In other words, anyone that did not have a 20% down payment was to be charged a higher rate than those with the full 20% down payment.
It was around this time too that the minimum down payment increased from the minimum of 0-5% to 5-10%.
At this point, the Canadian housing market was on fire. Housing prices seemed to be on the rise all over the place and continued to increase over the following months. In fact, by late summer 2017, the housing price index had increased by 11.48%.
The Most Recent Stress Test
In fall 2017 it was announced that January of the following year would bring a new stress test to first time home buyers, as well as those looking to renew their already existing mortgages with a new bank. Similar to the stress test already in place this test meant that anyone who put down a down payment that was anything less than 20% would be subjected to higher fees. This most recent test also questioned people’s ability to handle their potential mortgage should a cash flow situation arise. In other words, what kind of mortgage payment can a person or couple actually handle should a significant change in their income develop.
This most recent test was put in place for a number of reasons.
The first was to help lower the housing prices, making homes more affordable. The second, was to lower the number of potential foreclosures should the market take a downward turn as we and our neighbours to the south saw in 2008.Because this latest test is still new, it is tough to determine exactly how it will impact the real estate market as a whole. However, as of February 2018, the Housing Market Index had lowered by 0.1%.
Although these changes to mortgage regulations were done as a way to protect the Canadian economy and stop people from taking on more debt than they can handle they have made it more challenging for Canadian’s to buy a home. However, we have seen with each new regulation, although Canadian’s find it challenging for a little while, the market always finds a way of rising again and leveling out.
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